Barron's [subscription required] cover story suggests that Berkshire Hathaway Inc (NYSE: BRK.A) is overvalued. I think the stock has been rising because money is looking for a safe haven in today's volatile market. And Barron's is right to get people thinking about how safe that haven is as Warren Buffett's years as CEO draw to an inevitable -- and sad -- close.
Berkshire's market value is very high. It hit a record $151,650 last week and now has a stock-market value of $220 billion. But it's pricey -- based on several valuation measures, Barron's thinks it's worth $130,000 a share -- about 10% below the current quote. Here are two of those methods:
- Price/book. Currently, Berkshire's ratio of market value to book value -- its assets minus its liabilities -- is at 1.8 times its September 30 book value, of $77,800 a share. That's above its average of 1.6 in the past five years. It's also valued at 23 times estimated 2007 operating profits of $6,300 a share. 2008's profits are expected to be similar to this year's. If Berkshire were valued at 1.7 times book value, a premium to its five-year average, the stock would trade at $132,000.
- Insurance on book value, others businesses on profits. Some analysts value Berkshire by assessing its insurance units on book value and its other businesses on profits. Using this approach, Barron's came up with a value of about $130,000 a share. This calculation used a price/book ratio of 1.7 on Berkshire's insurance units' estimated September 30 book value. Barron's assigned a price/earnings multiple of 15 to projected 2008 operating profits of $2,800 a share for the non-insurance businesses.